Commentary

Transaction tax could boost London role

Position as forex hub would rise from euro-zone-only tax

By

WilliamL. Watts

FRANKFURT (MarketWatch)—Funny how things work out.

After all, the raison d’être behind the French-led push for a European financial-transaction tax is to ensure that bankers and others bearing the blame for the global financial crisis pay their fair share to clean up the mess.

Global forex market turnover
in 2010

country

percentage

Britain

36.7

U.S.

18.0

Japan

6.2

Singapore

5.3

Switzerland

5.3

France

3.0

Germany

2.1

Italy

0.6

Source: The Bank for International Settlement

Yet, given the dynamics of European politics, it appears likely that any imposition of a transaction tax will redound to the benefit of London, arguably already the world’s most important financial center and a bastion of the “Anglo-Saxon” style shenanigans French President Nicolas Sarkozy has spent years railing against.

And its London’s currency traders that could benefit most of all.

It’s all relatively simple. Sarkozy, trailing his Socialist challenger François Hollande in the run-up to this spring’s presidential elections, has already vowed to unilaterally implement some form of transaction tax in August.

The tax would create a “shock wave,” Sarkozy told French television in January, ensuring that “those who helped bring about the crisis” pay to restore public finances.

Meanwhile, the European Commission has drawn up its own plans for a European Union-wide tax. And Sarkozy and other European officials would still like to see a global transaction tax on the agenda at the Group of 20.

Calls for a global tax appear to have little momentum.

It’s also clear that any Europe-wide effort won’t include Britain, where Prime Minister David Cameron remains certain to veto any measure that would undercut the City of London, which accounts for around three-quarters of financial transactions in the EU.

Reuters

Britain accounted for nearly 40% of the global-forex-market turnover in 2010.

Given that roadblock to a European Union-wide tax, German Chancellor Angela Merkel and Italian Prime Minister Mario Monti in January indicated they were open to the notion of a tax that would apply across just the 17-nation euro zone.

Merkel and Monti have since appeared lukewarm to the notion. A meeting of European Union finance ministers on March 13 may be crucial in determining where the proposals go next.

But a quick look at the numbers indicates any such move would only serve to cement London’s lock on its role as the world’s global, forex-trading capital.

The Bank for International Settlement’s latest triennial central bank survey from 2010 showed that Britain accounted for 36.7% of the daily, global-forex-market turnover, up from 34.6% in 2007 and from just under 30% in 1995.

That is a $1.854 trillion chunk of a $5-trillion-plus pie.

The U.S. came in a distant second at just under 18% in 2010. Japan accounted for 6.2% of turnover, while Singapore grabbed 5.3%. Switzerland, with forex trading hubs in Zurich and Geneva, handled 5.3%.

Among euro-zone countries, France accounted for 3% of global turnover, while Germany saw 2.1%. Italy got a tiny taste at just 0.6%.

Throw in an effort by the British Treasury to turn London into a major center for trading China’s renminbi currency, and the transaction tax could help London “dominate the global FX scene for several years to come,” said Stephen Pope, managing director at Spotlight Ideas, in a note to clients.

Ceiling for Swiss Franc

(3:02)

The global search for safe havens has strengthened the Swiss franc so much that the Swiss are taking steps to reign in their currency.

The potential control of the dollar-renminbi peg and heavily traded cable, as the British pound-U.S. dollar pair is known, leaves London with no time-zone-based alternative, he said.

Geneva and Zurich are too small, while Paris and Frankfurt would suffer at the hands of a transaction tax, he said.

That is tough for Frankfurt, home to the European Central Bank, which never managed to capitalize on its once hotly-fanned expectation for a role at the heart of the euro.

Brendan Callan, chief executive of FXCM Europe, an arm of retail online-foreign-exchange broker FXCM Inc.
FXCM, -1.09%
said a tax in the euro area would undoubtedly boost the volume of trade moving through London.

That would be a boon for London-based firms that don’t have a presence in the euro zone, but would be inconvenient for larger firms, including FXCM, that have a global presence, he said.

Such a move could also send business to less well-regulated venues, he said, but noted that in the end, “the piece of the [global-forex trading] pie that would be applicable to euro-zone flow is pretty small.”

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